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U.S. Securities and Exchange Commission

Speech by SEC Chairman:
Remarks at the PLI 33rd Annual Institute on Securities Regulation

Remarks by

Chairman Harvey L. Pitt

U.S. Securities & Exchange Commission

New York, New York
November 8, 2001

These remarks reflect solely the personal views of Mr. Pitt, and do not necessarily reflect the views of the Commission, the individual members of the Commission, or its Staff.

Thank you.

It is great to be back for yet another Annual Institute. Sandy Geller and the co-Chairs have, as usual, done a terrific job of putting together an outstanding program, so I won't detain you for too long.

As my tenure as SEC Chairman commenced, we were confronted with the hideous terrorist attacks of September 11th, and their aftermath. These were not the events that I had expected would mark the beginning of my Chairmanship. But, we don't get to choose the circumstances that prevail when we enter the game.

Having been confronted with these circumstances, I can say that I am incredibly grateful for the wonderful efforts of those in the securities industry, the leaders of our self-regulatory bodies, and my colleagues on the Commission and its Staff. In a remarkable demonstration of elevating the public interest over narrow parochial concerns, all of those with an interest in our markets came together in partnership, and, operating as one, ensured the successful reopening of our equity markets.

With the passage of time, it is appropriate to focus on certain aspects of the agenda that I hope will occupy the Commission over the coming months and years. In thirty-three years practicing securities law, before being given the honor of chairing the Commission, I formed ideas about ways in which the things we sometimes take for granted about government in general, and the SEC specifically, could be improved. I'm sure each of you has done the same.

The notion that we can do better, of course, does not necessarily mean what came before was wrong, bad or inappropriate. Times, conditions and the needs of investors and our markets most assuredly change. And, I am excited about the prospect of putting into effect ideas about how government can, and should, respond to the needs of its various constituencies.

My starting point is that government is a service industry. Or, perhaps put more accurately, my point is that government should be a service industry! Government has enormous power, the SEC included. If we have power, however, we don't need to shout to convince people we have it. Instead, we can, in Theodore Roosevelt's words, "Speak softly and carry a big stick." Of course, our big stick must be used solely to achieve sound public purposes. Alas, that standard sounds easier than it actually is, since we all have the right to form our own views about what is a sound public purpose and what is an appropriate utilization of government power, and most of us usually do.

If you share my starting point that government is a service industry, however, it is an easy step to agree that government has an obligation to serve the people, not the other way around. I learned these principles, along with many other important lessons, at my mother's knee, and so I probably sounded like her when I recently told an audience of accountants, and as I now tell this audience of lawyers, that, during my tenure as SEC Chairman, you might not always like what the SEC has to say, but at least you can be sure you will always like the way we say it. I am repeating that message so you can pass it along to those you represent. Before significant decisions are made, all the Commission's constituencies should have ample opportunity for input and advocacy. Our Staff and we are anxious to demonstrate that government can be tough and effective, but nonetheless fair and efficient.

One of our first missions is to make the Commission as responsive as it can possibly be to all of its constituencies. This means soliciting your views, making sure we understand them, evaluating their merit, and then articulating a conclusion that is not only rational, but also readily comprehensible. Our constituencies are many and varied. They start with public investors. And they also include those needing capital, those raising capital for those who need it, and those who advise or audit all of these interests.

Putting this in direct terms, it means that we must always ask, first, whether a proposed action benefits (or harms) investors, and then, whether it strengthens (or weakens) the ability of U.S. companies and markets to compete in a new, global, economy.

These are my core principles, and I believe they are sound and appropriate. In our remaining time, I would like to tell you about some of our recent and upcoming initiatives, asking you to recognize that there is not enough time to tell you about all that we have planned.

One initiative is "real time enforcement." This is a serious new policy we are following so that we can better protect investors by acting quickly and effectively. It means we seek to learn of potential violations quickly and, where investor interests are being disserved or abused, take immediate action to undo the effects of any violative conduct. Faster enforcement will help prevent continued fleecing of the investing public and the dissipation of assets, and will allow us to use court-supervised methods to learn what other unlawful acts may have been committed.

We want to respond with alacrity, or real time, where violations are ongoing, or ill gotten gains may be squandered, while we perfect our evidence and complete our inquiry. Among other things, our Staff has been directed to look for creative ways to segment cases, so that wrongdoing can be publicly identified, and interim relief can be imposed that might effectively prevent the dissipation of significant amounts of investor funds.

A companion effort is our desire to encourage those subject to our regulations to self-report violations, self-correct those problems, and self-remediate those who have been injured by violations of law or policies. We laid out some of the standards in a recent §21(a) Report, so that companies and those who advise them could understand the types of factors we consider relevant in determining whether to take action against a particular company or individual, what action to take, and how to frame the action.

We believe "real time enforcement" will provide investors with meaningful protection. Our goal is to provide more effective and quicker recompense for investors, and better coverage of the markets without the need to increase our limited enforcement resources. If companies are encouraged to identify instances of securities infractions, bring them to our attention, and take steps to correct the misconduct, we will consider giving some form of "credit" for the benefits bestowed upon investors. Law enforcement officials and criminal prosecutors have long recognized, and utilized, the value of this approach.

This does not mean that we have gone, or will go, "soft" on securities violations or financial fraud. To the contrary, we will pursue those forms of misconduct aggressively, and expeditiously. But one of the primary goals of our enforcement program is to protect investors, so we will be receptive to giving some form of credit to those who provide benefits to investors who are unwitting victims of securities law violations. Another area where our enforcement program will focus over the coming months is our effort to stamp out recidivism. I have only been back at the Commission three months, but I am appalled at the number of repeat offenders we seem to confront at virtually every Commission meeting. There are two ways to deal with recidivism under our current statutory scheme - we can impose significant sanctions on persons who are two- or three-time offenders, and we can aggressively seek criminal prosecutions for those who present multiple violations of the law. We will make our expertise and our staff available to criminal authorities so that they can, through the criminal process, make our own civil enforcement program that much more effective.

In a similar vein, we have seen recurring situations where persons under investigation or being interviewed lie or dissemble to our staff or give false statements or perjured testimony in our investigations. Where we become aware of that kind of misconduct, we will make referrals to the Justice Department, and we will seek to impose the heaviest sanctions available to us, whether by settlement or litigation. The integrity of our processes requires that we be able to rely on the information we receive, whether provided under oath or informally, and we view as extremely serious any misconduct and misstatements in our investigative processes.

Another of our major initiatives is improving our current disclosure and capital raising mechanisms. They are antiquated. We will not discard them, but they should be supplemented and improved, and we should aggressively take advantage of technology, harnessing it to make our markets even more efficient, and more responsive to investor needs. The linchpins of the new disclosure system we envision should include:

  • Supplementing periodic disclosure with "current disclosure." While there are modest attempts at requiring current disclosure in our present Form 8-K, these are limited and ambiguous. In the system we envision, public companies may be required affirmatively to disclose unquestionably material information when it arises and becomes available, even if the information is learned before the next-scheduled periodic report is due to be filed.
  • Making use of technology to simplify disclosure documents without sacrificing the wealth of information companies are accustomed to supplying.
  • Encouraging the use of so-called "trend" information, to give investors the same kind of view of the companies in which they invest as is available to the managers of those companies.
  • Making financial information comprehensible to the average investor, and not just to rocket scientists and sophisticated financial analysts.

On the capital-raising side, we need to distinguish between unseasoned and seasoned companies, and make it easy for seasoned companies to access our capital markets within moments of the decision to raise capital. Many of the concepts in our securities laws are predicated on conditions that no longer accurately describe our current markets. We are confident that we will be in a position to do this, at the same time that we try to streamline and improve financial reporting.

We also are holding ourselves to the same high level of scrutiny.

One issue we are looking into is our oft-praised process of rendering informal assistance to those who must comply with the laws and rules we administer. Informal advice appropriately ensures that those in doubt need not guess incorrectly. It is an efficient, and inexpensive, way to secure greater compliance with the laws and rules we administer. There are some who wonder, however, whether our efforts to render informal guidance might not sometimes constitute an impermissible short cut to avoid all the procedures that normally attend formal rulemaking or adjudication.

To the extent we do nothing more than help those who seek to follow the law, no one traditionally has complained; but to the extent we have traversed the outer reaches of our authority, as some suggest we may, on occasion, have done, we need to be more meticulous to restrict ourselves to giving advice, or be forthcoming in declaring ourselves in full rule-making regalia. To figure out where the lines properly should be drawn, we have asked our General Counsel, David Becker, to review the various types of informal advice, comments and views our Staff and we issue, to determine whether we should make any changes to improve our informal procedures, and refrain from using them to make new rules or establish new standards of behavior.

The Commission also has much to do to join the current millennium. Among other things, we are seeking to create a new position of Chief Technology Officer, who can assist us, and those subject to our regulations, in making use of technology to achieve greater clarity for, and accessibility to, corporate information.

In this context, some of you may have noticed the order the Commission issued in connection with a proposed variable annuity offering by American Life. The concept proposed by American Life was that investors could only subscribe to the new investment via the Internet. Before being allowed to subscribe, they must agree to take access to corporate disclosures only via the Internet, in return for which the cost savings of eliminating paper are passed on to investors. In accelerating the effectiveness of this registration statement, we recognized that the passage of a new law, commonly referred to as the E-Sign legislation, necessitates our taking a fresh look at our prior guidance concerning the Internet. We are anxious to undertake and complete this fresh look very quickly. As electronic communications become easier and more widespread, our regulations must keep apace with investor demands.

These are just a few of our current and planned initiatives. You, who counsel clients, have an important role to play in our planned initiatives and under current law. We need you to advise your clients to comply with our established policies, and to interpret our rules and the relevant statutes, to provide maximum protection for investors. The securities bar has a solemn obligation in that regard; we are dependent on your faithful discharge of it. And, where clients may have violated the rules or laws we administer, we look to you to encourage your clients to come forward, disclose potentially inappropriate conduct, and take steps to remedy any harm inflicted on investors as rapidly as possible. We eagerly anticipate working with you to make sure that both you and we discharge our obligations prudently, generously and in the spirit with which the federal securities laws were adopted.

And now, on with the show.



Modified: 11/08/2001